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Key Observations of Recent Trade Action in the Soybean Market

Thus far we have two measured corrections, two sell-offs; the first one , and the second 8.4% in six days.

Soybeans are really what I would call a classic market during very aggressive advances for experiencing minor corrections,  so we can be assured this 975¼ is a very key low which I believe at this point does need to hold, absolutely needs to hold, if we are in as aggressive of a position as I hope we are. That does remain to be seen.

The next favorable indication is that there was a minor buy signal on the break of the 978¼ low followed by the reversal higher. You can see that as of April 8th, we declined to 978¼. We just clipped that low by 3¢ the other day without follow through to the downside.

In light of the reversal to the upside that is a very good sign. It means that essentially there was a stop raid beneath that low which was followed by an immediate reversal. That’s always a good indication, particularly as I say here, very impressive reversal on Wednesday, April 29th with follow through today, the 30th.

We’ve got this follow through to the upside, and needless to say the shorts have a lot to think about at this point in time with respect to the implications should we exceed that 1076 high.

Looking at the July soybean oil, a number of observations. A break beneath 34.71 with follow through to the downside in the pit session would be problematic for our bullish stance in our long positions that we currently hold for subscribers.

If we are to replicate the more aggressive of our projections, I believe we must move higher from here. I like how we’re situated. Soybean oil is not experiencing the kind of percentage advance that we have in the soybeans over the last three to four days so in my estimation it will be playing catch-up.

As in the July contract in the soybeans, you can see that we have this lower top in the soybean oil so there is going to be a very significant number of buy stops building above that level.

Since I believe that we’re in a bull market in the soybean complex, I expect that those stops are going to be hit en route to a continued advance in what is a second leg up in a bull; the first leg up being off the December low, second leg off this March 16th low.

Dropping down to our next observation. The soybeans fractionally broke beneath the equivalent of the 34.71 low so that in the previous chart we broke this 978¼ in the soybeans, but you can see in the soybean oil we made a slightly higher bottom by .16 so we did not run the stops there.

If we were to break that 34.71 that would be problematic but I believe this is a bullish sign overall in taking these two contracts – the July contract in the soybean oil and the July contract in the soybeans – taking them in tandem. I like the near term trade here.

Looking at the nearest futures in the soybeans, these were our four closest fit projections in history; the primary one being the 60-year cycle in 1949. We dipped down to what would be the angles of ascent during 1978 and 2005. This surge is likely going to carry us higher if we’re right in the market so that we can track this 1949 market.

We have long July call option positions in the soybean oil which expire almost exactly when the projected 1949 advance would be complete. You can see how far we have gotten so far, and if we were to replicate this 1949 advance then we would have significantly further to go to the upside.

Is that going to happen? I don’t know but we’re still very early in terms of the time period of this leg up. Legs up do not complete in this as abbreviated of a time period as we’ve experienced so far to the upside.

I like our prospects to the upside. I like the technical condition of the market.

In the soybean oil, as a result of this recent sell-off we can dismiss the 1976 precedent as the precedent which is going to dictate trade.

The 1949, I experienced a comparable percentage advance. It was up 61%, it just took a longer period of time, but as I mentioned, since we’re holding call options, the 1949 market would top out, let’s say here. The same price objective as the 1976, actually a little bit more, but there is still the time left in our options.

If we were to see, for example, the July soybean oil advance to 46.00 then we would be experiencing a 12:1 risk/reward on our long positions that we’ve recommended for subscribers.

We’re also long futures positions and have a pretty significant position overall in this market so I believe that is justified. We’ve been adding two profitable positions, adding on the way up. At the end of this move it is going to be very interesting.

There is also going to be opportunity on the other side of the mountain. There is a lot of research that we’ll be giving subscribers with respect to that, as well.

I really like the prospects of this market particularly in light of the last couple of days of trade.

* Please comment on the video at the bottom of the page *

High Probability a Final Bear Market Low is in Place in Overall Commodity Prices

Point two: I believe there is a high probability of final bear market low is in place in overall commodity prices. The sheer violence of the waterfall decline followed by the trading range we have experienced since December argues for a final low; however, there are a couple of qualifiers here.

First, the damage that has been done, wealth destruction, has been so great there is no expectation nor historic precedent for commodity prices regaining the historic price levels achieved last year for a very long time to come.

Carrying Charge Premiums Diminish Wealth Building Opportunity

Secondly, the carrying charge premiums in the various markets, most notably in the crude oil and energy markets, are exorbitant and greatly diminish the probability of any great wealth-building bull market occurring for probably a very long time. In other words, we are projecting a bull market in overall commodities but one which needs to be approached as a trading market for the time being.

As you will see, the excessive carrying charge premiums are also in effect in the wheat, corn, oats, and cotton Just as a review, for those of you that perhaps don’t understand how the carrying charge premiums work, if we take the current contract in the crude oil, let’s just say the May contract, and we look at the contract in May of 2010 (one year hence), the 2010 contract trades between 20 and 30 percent above the current price. In other words, the current price on the nearest futures of the spot market is far beneath the future contract in May of 2010.

When you go out and you buy crude oil for delivery in 2010, you have to pay this huge premium. What we know historically, and we have done a huge amount of research on this, is that when there are large premiums in a market like that, it is a hindrance to making money. This is because, even if there is a bull market, that bull market in the cash market would have to advance 20 to 30 percent over the next year just for you to break even in the futures market.

It is like the market has a 27 percent interest rate. The equivalent of a credit card rate of interest in holding current contracts. This makes market participants dependent upon the market, the spot price, to move up more than what that premium is in order to make money, and that makes things very difficult for those on the long side.

Really, what it amounts to when we have conditions like this is it is better to be a trader in the market back and forth, and it goes back to also the option market; doing option writing can be the most effect means to make money in this environment.

Potential for a Final Low Based on 1920 and 1948 Historic Crash Precedents

I first want to show a table of all of the bear markets which have taken place across our board between 2008 and 2009. We see that most markets did bottom in 2008 and with a number following through into this year. Basically December, October, and December lows is when the final lows were established.

Now, the overall decline in these markets was 60 percent, but you can see that those in the purple were over 70 percent, all of the energy markets and also the copper markets. Anytime you see markets move really into the 60 percent and into 70 percent, we are looking at historic bull markets of the highest order.

The percentage retracement of the previous bull markets which started in 2001 averaged 78 percent. In a matter of  about five months, all of these markets retraced what took seven years of advances in price to culminate in the final top.

We have seen a waterfall You could call it a crash, call it whatever you want, the expletive that you would want to use for this market. It is of the highest order of deflation that we have ever seen in 200 years. In 1920 and also 1948 waterfall declines, or crashes occurred, but they culminated. In other words, those precedents established final bear market lows. It is based on those two precedents (1920 and 1948) that I believe that we have a final low in place.

The carrying charge premiums as of March 25th for 12 months out:

• Heating oil: 16 percent higher than the nearest futures
• Crude oil: 21 percent higher than the nearest futures
• Gasoline up 14 percent higher than the nearest futures
• Corn 14 percent higher than the nearest futures
• Oats a whopping 29 percent higher than the nearest futures
• Wheat 17 percent higher than the nearest futures
• Orange juice 19 percent higher than the nearest futures
• Cotton 20 percent higher than the nearest futures
• Lumber 19 percent higher than the nearest futures

Generally, this means that there is going to be basing action, or backing and filling all the way up. That does set our expectations. One thing that is interesting here is that you can see that in the soybean complex which we are holding long call option positions in, you can see that the premium is only six percent in the bean oil. Actually, it would be considered backwardation in the case of the soybeans. The distant contract is trading five percent lower. This would be considered normal premiums. Therefore, by participating in Soybeans, it means that we are buying value, and we don’t need to see the spot or the cash price advance like we would need to see in these other circumstances. That being said, that is a good market for us on this basis to be long in right now.

The Great Bear Markets in History

Crude oil declined 78 percent in five months and eight days. On a percentage basis that ranked as the seventh greatest out of a total of 20 that were in the elite category. But in terms of time, it ranked as number 20 in terms of length. It was far and away the shortest bear market in history; the second shortest being the cotton market during the 1920 to 1921 period.

On that basis, I had felt that we would probably see another leg down in the crude oil, obviously not the velocity that we have seen in our market that we had seen into the December low because we had come down 78 percent. I am not sure if that is gong to be the case. This ranks as the greatest decline in any commodity in terms of percentage move in the shortest period of time in history, and so it ranks at number one of twenty. This decline was rapid, culminating in dramatic fashion, and a bear market low is probably in place.

These are the historic bear markets following the great inflations in history. In 1920, we had this dramatic waterfall decline, but the final low in June of 1921 was a historic low, and the next bull market started, but the bull market was gradual in comparison to the decline.

1929-1932: Great Depression Deflationary Scenario in Commodity Prices

In the 1929 to 1932 period, all of the commodity advances were extremely modest, so this deflationary scenario in commodity prices during the Great Depression is one of a kind in terms of our historic database. The rallying power and consolidation in our market means we have basically divorced ourselves from the likelihood we are mimicking the minor rallies during the Great Depression.

What can we take away from that?

• We are not carrying the earmarks of the Great Depression at least in terms of overall commodity prices
• Our decline was much more rapid than occurred during the Great Depression
• We are experiencing consolidation that we didn’t experience during the Great Depression.

In other words,  overall commodity prices definitely have a unique signature that is more akin to the 1920 market than the Great Depression 1930′s market. That in and of itself would tell us that we are not a perfect parallel to the Great Depression. Hopefully that means that we are not going to see our economy disintegrate. That would be in favor of the possibility that we even have a low in place in the stock market, and that certainly is a possibility.

This is the 1949 market, but the waterfall decline in this market occurred and culminated, and then a major low was established, and you can see that the market moved higher here and actually exceeded the bull market top in 1948 but didn’t do so for about two years.

60 Year Cycle Almost Right on Schedule in Commodities

The Goldman Sachs chart (see video) shows projections of how these historic market movements occurred by overlaying them on a current chart to see how a mimicking move would play out.

This 60-year cycle I believe is the most important. It projected a final low in commodities in April of 1949, and our low is February of 2009. That is within two months of this replicating the 60-year cycle 1949 low.

Crude oil bottomed in December, but overall commodities touched a new low in February. On that basis, it would say that we are going to start s long-term bull market in commodities, but it was very modest to begin with.

Great Commodity Bear Markets

In 1974 market spiked up.  Then, the market ultimately culminated in a final runaway advance in 1980. We did see a spike up, a sell off, a violent rally, and then a secondary decline, but this waterfall decline in 1974 did culminate in a historic low in 1975.

This was a very short-lived bear market. Following the historic high in 1980, we experienced the crash of precious metals into March of 1980, and then overall commodity prices advanced until September of 1980. That started a long-term bear market which actually didn’t culminate until the year 1998.

(See the video for a chart of the Goldman Sachs commodity index) The recent decline in the Goldman Sachs commodity index is the greatest wealth destruction decline in commodity prices in history in the shortest period of time.

Between July 2, 2008, and February 19th, we declined 66 percent in seven months and 17 days. Recently, we have seen an advance of about 25 percent to the upside. Lately we have had basically trading range action.

The problem is that if we have this modest leg up in commodities and markets like the crude oil are at a 20 percent premium and cotton are at a 20 percent premium in these distant contracts over the front, then that diminishes the potential return to the up side. We need to calculate that into the equation and say that we expect to see some of these markets make modest moves, at least in the futures contracts whereas the underlying cash will be more dramatic.